Xinyi Energy’s 2022 Earnings Trail Expectations

Xinyi Energy’s 03868 2022 net profit of HKD 971.5 million, down 21.2% year on year, was below expectation. We believe the miss is mainly due to a HKD 223.8 million write-off of subsidy receivables, slower capacity expansion on the back of COVID-19 disruptions, and high solar module costs. Consequently, total dividend per share for 2022 dropped 13.2% year on year to HKD 0.151. Meanwhile, core performance is intact, as 2022 adjusted EBITDA margin at 92.4% was in line with our expectation. We keep our fair value estimate of HKD 3.12 after reviewing our assumptions and we think the shares look attractive now with dividend yield of about 7% in 2023. However, share price performance may be capped by the disappointing write-off in the near term. In our view, the write-off is a prudent provision by management to reflect potential risk in the subsidy audit by the government. This is one-off in nature, and we do not rule out the possibility of a reversal later on.

The positive surprise in the results is the collection of CNY 1.88 billion of subsidy payment from the government in second-half 2022, as the firm did not receive any in first-half 2022. We think this is important for Xinyi Energy, as better operating cash flow could help the firm fund its ambitious acquisition plan.

Xinyi Energy added 520 MW in solar capacity in 2022, lower than guidance of 800 megawatts-900 megawatts. In 2023, the firm plans to acquire 700 MW-1,000 MW from parent Xinyi Solar and third parties. We think this is achievable, as the firm already added 300 MW in February, while solar module costs should be lower in 2023. Xinyi Solar has a pipeline of about 1,000 MW available for Xinyi Energy’s acquisition as of end-2022, and we forecast Xinyi Energy’s capacity to grow at CAGR of 19.7% through 2022-27. The capacity expansion should continue to increase Xinyi Energy’s gearing level, but we think the firm’s financial health remains sound, with net gearing ratio of 27% as of end-2022.